I don’t get things right as much as I’d like when it comes to the market but my Latticework Linkfest back in late February was spot on:

In times of recession, when unemployment is high, the unemployed go back to school to add marketable skills and increase future earnings power. The leading companies in for-profit education include Strayer Education (STRA), DeVry (DV), ITT Educational Services (ESI), Career Education Corporation (CECO), Capella Education (CPLA), Corinthian Colleges (COCO), and industry giant Apollo Group (APOL). Apollo operates the ubiquitous University of Phoenix campuses. This investment thesis has worked in past recessionary times, but the unique risk this time around is the possibility that the credit crisis will hamper students’ ability to repay or obtain school loans.

The for-profit education companies mentioned have for the most part been immune to the market’s recent collapse. Some have even made significant money for their investors. The risk that students and prospective students being unable to borrow tuition dollars is still very real but has yet to have a material effect. Unlike a sample basket of leading technology bellwethers like Apple (AAPL), Google (GOOG), Yahoo! (YHOO) eBay (EBAY), Microsoft (MSFT), Amazon.com (AMZN) and Oracle (ORCL) that destroyed wealth, if you invested in a basket of these education stocks, you’d have a juicy profit or at least preserved most of your wealth.

The leading education companies collectively appreciated approximately 31% since my post published February 25 all the way to yesterday’s closing prices. If an investor had put $100,000 in each of the leading companies in that space, that basket would be worth over $921,000 today. The leading technology companies, as great as their brands and products may be, collectively lost almost 26% of market value. The index that is most apropos as a benchmark in this comparison, in my opinion, would have to be the NASDAQ Composite, which lost 26% of its value as well. An investor putting initial capital of $700,000 in either the NASDAQ Composite or the technology basket would have only $518,000 of value remaining. That’s a whopping difference of approximately $403,000 between the education portfolio vs. the technology portfolio or the NASDAQ index.

Have I been able to profit off this insight? Unfortunately no. I went into cash on June 25th for the majority of my portfolios and my private investment partnerships. In a summer of uncertainty and volatility, I thought it would be a prudent measure to preserve wealth – which has turned out to be a service for my investors and myself (unless of course inflation is higher than what the government is officially reporting). The real estate asset bubble appeared to have made other things expensive as home equity propped up prices in the stock market and other financial markets.

What’s next? Given the stellar performance of for-profit schools, I would take some profits off the table. As much as I admire Warren Buffett, I don’t have the capacity for pain to buy and hold like the old master of value investing. On a macro level, the risks to the education sector in particular and the market in general are still profound. The next shoe to drop will be fund redemptions or withdrawals from mutual funds and hedge funds, which I alluded to in Long Term Capital Mismanagement. If this occurs in a heavy way, the overall market will lose some more value and push us deeper into this bear market. The other shoe that could drop would be a failure of the consumer credit market. Credit card companies will reduce credit lines as consumers fail to meet monthly credit card payments. Consumers no longer have rising home equity to feed their spending habits. Rising unemployment also increases the likelihood of household bankruptcies.

What can we learn from this downturn?

From an investing point of view, there are always countercyclical investments available. Higher in the value chain of countercyclicals are the for-profit education companies. They are far more attractive than the conventional defensive stocks such as food manufacturers like Kraft Foods (KFT).

From a business point of view, I can only speak from the technology startup standpoint as that is where I spend much of my time. It is nice to see that people will be going back to school to learn new skills and improve their future earnings. But as much as I believe that talent can come from anywhere, as a startup entrepreneur I can seldom take the risk of hiring people out of these for-profit vocational schools. I’d rather hire someone without a degree but was passionate enough to teach himself how to write code. Or I’m looking for the genius from Stanford or MIT who dreams in code.

We all know that the rigor of most of these vocational schools like Strayer and University of Phoenix just isn’t up to par with our top national universities or even regional ones like University of Utah, Brigham Young University, University of Colorado, University of Arizona, or University of Nevada Las Vegas. Vocational institutions’ lack of selectivity (anyone can sign up for school with Strayer while prestigious institutions like UC Berkeley reject an overwhelming majority of applicants) and their lack of rigor means a bunch of job candidates with bad habits. Of course there are rare outliers and standouts, but does a startup have the time to evaluate and separate the few good from the mostly mediocre?

A startup’s early days are its most productive and critical. Founding teams employ magic to make something out of nothing. Startups cannot afford to take risks on what most likely will be mediocre talent. Let the large soulless organizations like Ingenix (UNH), Convergys (CVG), and IT departments across the Fortune 500 suck up all the graduates from vocational schools like Strayer, Capella, and DeVry. While the for-profit education companies can make for great investments, their graduates would usually make poor investments.

With so much at stake, the future of video promises to be a most entertaining saga. Many players are trying to figure out how to navigate the shifting technological landscape. How video entertainment is created, delivered, and sold is changing with breathtaking speed. New competitors are entering the market and current leaders are scrambling to defend their turf.

Blockbuster (BBI), playing the part of copycat, will soon announce a set-top box similar to what Netflix (NFLX) unveiled at the Consumer Electronics Show earlier this year. The two companies have seen their fortunes move in opposite directions. Blockbuster’s stock has fallen about 49% over the past year while Netflix has seen a 48% rise in its stock price. I have to commend Netflix for attempting to rewrite their own game changing model. It pioneered the mail order rental model, put a very good Internet component to the ordering process, and now is trying not to fall prey to outside innovation by tackling the problem and opportunity of digitized video delivery. If creative destruction is going to happen, you might as well do it to yourself. At least the two companies are trying; laggard Movie Gallery (MOVIQ.PK) looks dead even as it attempts to exit bankruptcy.

But will any of this matter? Distributing a digital set-top box that allows Netflix and Blockbuster to deliver video over a digital network puts them squarely in competition with Comcast (CMCSA) and other large cable network operators. Comcast already has pretty good video-on-demand services and owns that relationship with the consumer. It already has millions of cable lines breaching the last-mile problem. Getting consumers to adopt newfangled digital set-top boxes will be much easier for Comcast and its cable peers than for Blockbuster and Netflix.

Investors will also have to keep an eye on the currently free and rudimentary video sharing services such as YouTube (GOOG), GoFish (GOFH.OB), and their private brethren. There are dozens of free video sharing sites that are growing quickly by allowing users to upload and share home videos, amateur content, and the equivalent of podcasts – videocasts. What I call the Age of Amateurs has taken hold of public attention but that will give way back to the professional content producers. They’re cute now, but how many skateboarding dogs and Obama Girls can we watch? As with all things social on the Internet, we will grow up. Granted, I think the future will be kind to a creative combination of the amateur and the professional. Joost, founded by the guys who brought us the popular VoIP service called Skype (EBAY), looks like a potential winner in that regard.

The challenge for these video sharing social networks will be in improving video compression software such that professional-quality video can be beamed down Internet pipes without loss of viewing quality. Companies like Sorenson Media, Fibridge, and DivX (DIVX) are all trying different approaches to solving that problem. Full disclosure: I’ve performed very preliminary, basic consulting for a Sorenson Media subsidiary. If video compression codecs can improve exponentially, Comcast, Blockbuster, and Netflix may well have to concede the future of video to the Joosts and YouTubes of the world.

Bottom Line: my bet is that Comcast wins the battle on professional video-on-demand and the video sharing sites will own the rest. I would bet against Blockbuster and Netflix in the long term. The shorts agree on this one as both Netflix and Blockbuster have tremendous numbers of shares short as a percentage of their respective floats.

What really surprised me from the article was that many startups were putting their cash in ARSs without the knowledge of their venture investors. I’ve always believed that early stage ventures should outsource their CFO functions. Good chief financial officers are difficult to find and oftentimes startups’ finances are not complex enough to warrant a full time CFO. Spending decisions should absolutely remain the domain of the entrepreneurs and executives that are closest to the market and know at an intimate level the costs of competing. But investing and financing activities can be handled by an outside expert, at least until the enterprise meets success and its finances become more complicated. Most technology entrepreneurs, especially the ones in software, are not necessarily well-versed in finance.

My previous startup, a venture-backed software company called mediaFORGE, employed an outfit called CFO Solutions. Many venture funds have hired the folks at CFO Solutions to help manage the financing activities of their portfolio companies. I think Silicon Valley Bank (SIVB) provides some of these services but could do better advertising.

Of course, I’m sure few could have predicted the credit crisis and its damage to the ARS market. The concomitant recession fears will also put a damper on the availability of venture funding. The current market environment will not be very receptive of initial public offerings, one of the major exits for venture-funded companies and their venture investors. Startups currently in fundraising mode should try and raise more than they think they need because VCs are going to be rather tight in the near term future. It’s a strategy the PayPal (EBAY) guys implemented when they foresaw the need to ride out the dotcom crash. I have yet to decide if we’re going into fundraising mode at my new startup, SocialOptimize.

Since my current work is in new media and social networking, I am keenly interested in the turbulence facing the newspaper industry. Clients, ranging from Fortune 2000 companies to small innovative startups, come to my team at SocialOptimize to gain an understanding of the new media landscape and to develop an actionable strategy for building a meaningful presence in social networks. They ask about their traditional marketing budgets and I tell them that we will see the disappearance of many old model newspaper, radio, and television companies as they struggle and fail to adapt to the reality of new media on the Web. Consumers are spending less time watching television, listening to radio, and reading newspapers. Instead, they are spending more and more time on the Internet for their news and entertainment needs. Very few traditional media companies will emerge stronger from this “dislocation” but the opportunity exists for several to transform themselves into new media leaders.

As an investor, I train my eyes on public companies that report the news who are also making headlines themselves. During periods of disruption, large sums of value get destroyed but great opportunities arise at the same time. Thus my ears perked up when I learned that Harbinger Capital, playing the role of activist investor, initiated a proxy fight by nominating four candidates for the New York Times (NYT) board of directors. The New York Times, being one of the leaders and most important assets in traditional media, has been causing great anxiety and nervousness in shareholders. Newspaper subscriptions and newspaper advertising revenue, the old metrics of success, are steadily declining and this has caused a panic in investors. I argue that newspaper subscriptions can no longer be relevant in the evaluation of this company. While advertising revenue of course remains the lifeblood of media companies, revenue from the printed page should diminish in priority. The company needs a dramatic rethinking of what it means to be relevant and influential and how to reconfigure its revenue base. Harbinger seems to be on the same page as it calls for “bold action” in the form of selling off business units and increasing investments in online efforts.

If Harbinger succeeds in placing its nominees on the board, I think it will have its greatest impact by helping the company allocate capital in a more logical manner. The company should start by deemphasizing or changing its editorial makeup. Americans perceive mainstream media outlets like the New York Times as “out of touch” and severely biased in favor of liberal policies and politicians. Whether this bias is true or not matters little, one can only respond to the marketplace with logic and logic dictates that the customer is always right. This presents an opportunity to drastically cut the expensive editorial staff and balance it with editors of more conservative leanings. In no way am I advocating for a government mandated Fairness Doctrine. I’m pushing for a market-mandated, self-regulated, fairness regime that satisfies what consumers and readers are asking for. This will go a long way in maintaining relevance and influence while generating substantial cost savings at the same time.

As for overhauling its revenue base, I think that the New York Times has taken good steps towards improving its online efforts. Only Rupert Murdoch’s News Corporation (NWS-A) has arguably done a better job at shifting revenue streams online. It doesn’t get a lot of press for its investments in the Internet, but some of the companies it has invested in are very compelling. As with all new businesses, patience is required for a few of these to work out and become substantive revenue generators. Many of these have ambiguous business models to begin with and it will take some time to adjust to the market and settle on a viable strategy. I expect some of these will not gain traction and will fail, but that is the perilous, creative, and destructive nature of our evolving online business environment. Here are some of the company’s more notable recent investments in a portfolio style overview:

Earlier this year, NYT co-invested with a few venture capital funds in San Francisco-based Automattic. Automattic’s primary product is the blogging platform known as WordPress. WordPress software can be downloaded for free and hosted on private servers. WordPress.com is a hosted blogging solution that many major media outlets are turning to as a cost-effective solution for serving blogs and other content. Large media companies such as CNN, Fortune, and Fox are paying for the company’s WordPress.com services to host their blog content. WordPress is one of the leading content serving platforms on the Internet and continues to grow in popularity. I think Automattic will carefully find other ways to monetize the technology including serving advertising.

The Internet is a medium that is conducive to the convergence of different types of media such as text, video, and audio. The clean divisions between newspapers, radio stations, and broadcast television that existed before the rise of the Web no longer apply. In early 2007, the New York Times joined with other media companies such as Time Warner (TWX), GE Global Media & Communications (GE), Hearst Interactive Media, and IAC/InterActiveCorp (IACI) to fund Brightcove, a developer of IP video technology. Brightcove technology hosts and serves content published by professional media businesses. Brightcove has emerged as one of the more successful alternatives to YouTube for consumers of video content.

Just earlier last month, NYT partnered with Sam Zell’s Tribune Company, Gannett (GCI), and Hearst to form a joint venture called quadrantONE. Yet another in a long line of advertising networks, quadrantONE will sell localized online advertisements, primarily display or banner ads. Given that this network will include many regional and national newspaper organizations, it stands a reasonable chance of achieving success. The challenge will be to educate smaller, more localized marketers about this differentiating factor. Many small marketers are still only aware of Google’s (GOOG) advertising platforms. The real opportunity here belongs to the regional and local metro papers. Consumers will return to demanding more quality localized news and content. If the local news agencies can meet that demand, they can create the inventory necessary to make a localized ad network like quadrantONE a viable competitor online.

NYT has also invested in Federated Media, an ad network for blogs. There will always be a place in this world for professionally produced news content. I certainly don’t want an amateur giving me the scoop on a tightly guarded political scandal. Most amateurs don’t write well enough to convey the juiciness of the drama. And if an amateur suddenly stumbles upon a juicy scoop and is capable of writing cogently about it, that person immediately becomes a professional. Such has happened in the world of blogging. The new world certainly has space for an army of amateurs sharing their opinions regarding everything under the sun. This distributed rather than centralized model of content creation opens up opportunities for a talented few to break into the ranks of influential professionals. The good ones generate a relatively large following. Federated Media helps this top tier of bloggers monetize their audience and content. A recent rumor has management at Federated Media rejecting a $100 million buyout offer.

The rise of Craigslist, partially owned by eBay (EBAY) has devastated the classifieds advertising market for newspapers. Job listings revenue, usually the most lucrative segment in classifieds advertising, has fallen way down. The migration of job listings off news pages to online job boards such as Monster (MNST) only worsens the situation. The New York Times hopes its investment in Indeed, a search engine for jobs, will help it recapture some of those lost revenues. Indeed promises to give job hunters access to millions of job listings aggregated from online job boards, corporate websites, and newspapers.

I did not know there was a New York Times Research & Development Group. I hope the boys at Harbinger don’t look at this little skunk works team as a waste of scarce capital. Innovation and breakthrough business models take time and freedom to develop. I already look upon corporate-directed incubators with skepticism but when the parent company accepts that it is in crises mode, there might just be a chance for the mad scientists and geeks to make an impact. Shifd is a new mobile Web application that allows users to share content between their desktop computers and mobile devices. Shifd, pardon the pun, is a paradigm-shifting idea. It makes possible a future in which we don’t have discreet devices separate from each other. All our information lives on the Web and is available to us from any device and custom-configured to our needs. Your cell phone and your desktop computer will have roughly the same utility and functional profile.

Daylife calls itself a “news site and distribution platform.” It is a different take on the aggregation of related news items and competes against the likes of Digg and Reddit. Instead of relying solely on a community of users to vote news stories up popularity rankings, the company appears to utilize its own search technology and algorithms to organize related news articles. Daylife also offers Web widgets that help other publishers expand their news content. The New York Times invested in this startup in late 2006. If I had to short one of these startups, Daylife would be the one. I love their user interface design; these guys are definitely in tune with the modern aesthetic. However, the competitive landscape for news aggregation is simply too crowded and the company does not offer anything so different and compelling to suggest that it can take users from Digg, Reddit, or even Google News.

WideOrbit provides software systems that automate and manage the sales, traffic, and billing of advertising. It sells its products to radio stations, television broadcasters, cable networks, and data centers. This sounds like a wonderful product as I am sure that relatively few people are putting their minds to solving the billing management needs of content publishers. Most entrepreneurs are focused on the deservedly hyped Web 2.0 space. This may not seem core to the business of the New York Times, but any model that puts the company in the middle of revenue flows will create value. Non-core businesses such as Federated Media and WideOrbit may create value for the company as they are sold off at rich multiples and for handsome returns. But in this uncertain time, who really understands what is core and what is non-core?

Again, Harbinger Capital is spot on with its call for a dramatic rethinking of the New York Times’ business model. Much capital can be allocated away from traditional business activities to online efforts that can significantly change the structure of the company. New profit centers will arise and the company’s recent investments in Web startups give it a good chance to navigate the future. What the New York Times needs right now is a stable of patient investors.

Update 3/17/08 – The New York Times came to a compromise with activist hedge funds Harbinger Capital and Firebrand Partners by expanding board seats by two outside directors. Scott Galloway of Firebrand and James Kohlberg of Kohlberg & Company are the two outside nominees slated to join the board of directors.

Advertising Age is reporting that U.S. media employment fell to a 15-year low in December 2007. The major driver behind this slump is the struggling newspaper industry. This is not surprising because nearly everyone is spending more time getting their news on the Internet and less with broadsheets. Exacerbating the losses is the disappearing classifieds business as online alternatives like craigslist, partially owned by eBay (EBAY) offer cheaper and more immediate classifieds solutions. The New York Times (NYT), also known as the Gray Lady to the cognoscenti, recently announced another 100 job cuts as a result of diminishing revenues and profits.

Suffering to a lesser degree are the broadcast and cable television companies. Still, recent studies show that consumers are spending far less time surfing the boob tube and much more time online for entertainment on websites like YouTube which is owned by Google (GOOG). Employment numbers are falling here too but to a lesser degree than in newspapers.

Rounding out the traditional big three in media is the similarly suffering radio industry. Blame Steve Jobs and his Apple (AAPL) iTunes-powered iPods for the vanishing radio listener. The Billboard Music Charts just don’t have the same clout and influence they used to as music fans take control of their own playlists by getting farther out on the long tail. Who needs a disc jockey to tell you what’s hot when you can discover that perfectly obscure independent band on the Internet?

All is not doom and gloom. While traditional U.S. media is quickly shrinking, the U.S. advertising/marketing services industry is growing at a healthy clip. Advertising agencies, marketing-consulting services, graphic design, public relations agencies, and media-buying agencies are all segments witnessing expanding payrolls. This flies a little in the face of the argument that content is king. At least with job counts, it seems that those who subsidize the creation of content is king. Or perhaps content is still king but influence is moving away from professionally produced content controlled by a handful of conglomerates and towards massive amounts of user-generated content by amateurs and independent bloggers. Top bloggers are making a great living and their “jobs” aren’t being counted.

The growth in advertising/marketing services jobs bodes well for the startup that I am just beginning to build. SocialOptimize, my social media development and consulting agency that I co-founded, was started to answer a huge need in the marketplace. My partner and I found that huge corporations, members of the Fortune 2000, were in dire need of help addressing the burgeoning social networking and social media space. Huge user-generated content sites like Myspace, owned by News Corporation (NWS-A), and Facebook, partially owned by Microsoft (MSFT) are capturing the majority of consumers’ time spent online. Advertising dollars will flow to these platforms as agencies like SocialOptimize steer corporate marketing dollars to where the eyeballs and wallets are congregating.

Going forward, it will be interesting to see how Advertising Age will count the jobs and advertising dollars associated with social networking web applications and widgets. Software developers are finding ways to serve advertising through their apps and widgets. At SocialOptimize, we have had big marketers propose advertising on our own proprietary widgets because our apps offer marketers much more value than traditional advertising channels like newspapers and radio. This value comes from the ability to target deeper audience segments while offering demographic data and evidence of return-on-investment (ROI) at a more granular level. Well-designed apps are also much more engaging than traditional media, causing consumers to spend enormous amounts of time interacting with the apps and the social networks attached to those web applications and widgets.

The big negative about this report is that I’ll have to compete even harder to attract top talent to SocialOptimize. Good talent is so difficult to find!